Reverse Takeovers Purchasing a Shell

Grand Avenue Capital Partners LLC

Reverse Mergers
Reasons for increased activity in reverse mergers:

Alternative strategy for going public Greater access to capital Greater valuations in raising capital Sarbanes-Oxley Chinese Companies

Greater Access to Capital Greater Valuation in Raising Capital

Premium for publicly-traded companies Generally 50% to 100% For early stage/emerging growth companies can be much higher

Greater Access to Capital

Capital Markets Today

Fewer deals and lower valuations in venture capital, private equity, M + A transactions M & A activity

Turmoil in credit markets

Funding Gap solution for Emerging Growth Companies

For Companies

Revenues from $0 to $100 million Limited history of earnings High growth potential Not satisfied with valuations in private equity and M & A markets. Need less than $80 million in an IPO. Chinese companies seeking to raise capital in the US.

Private Investments in Public Entity Major Capital Source for Small Public Companies

PIPEs Private placement/commitment to register shares Faster, easier than IPO or secondary

Major Capital Source for Small Public Companies

Highly flexible Negotiate protections for investors Can be dangerous for issuers if not structured properly

Resets Floating Convertibles Toxic Convertibles Death Spirals

Advantages of Reverse Takeovers

Liquidity for prior investors Equity incentives for key employees Use of equity in making acquisitions Industry roll-ups and consolidations Arbitrage between cost of acquiring private companies and valuation of raising capital for public company Faster than IPO or direct registration
8

History of the Shell RTO

Post - 1960s Operating companies Blank check public offerings 1992 SEC Rule 419

Reduced supply of shells Started to clean-up the shell game

The Private Shell Strategy

History of the Shell RTO

1999

Bulletin Board requires SEC reporting NASD imposes unwritten requirements for Bulletin Board trading Wulf and Worm letters NASD Notice to Members 00-49 NASD investigates some Bulletin Board applicants

Today non-BB shells have risks of not getting on BB without SB-2

10

Shell Market Today

Large demand for Shells Much smaller supply of good shells, higher prices Many private companies taking risks with non-Bulletin Board or unclean shells

11

Where Do Shells Come From?

Previous operating companies 419 shells Manufactured shells

Formed as a blank check and obtained shareholders through public offering, private offering or gifting shares

12

How to Find a Shell

Shell websites Shell brokers Shell owners

13

Purchasing a Shell

Purchasing a shell v. doing a reverse merger

Most owners of clean Bulletin Board shells are deal driven They are not selling a shell

Non-trading shells and stalking horse shells are sometimes for sale Non-clean shells are for sale

14

Reverse Merger Basic Terms

Cash and Equity Amount of cash and equity depends on perceived value of private company Selling the value of the private company is important Amount of cash also goes up if private company wants more equity High percentage and low percentage deals How much equity How much float

15

Action Plan for RTO

Determine whether Reverse Takeover is best course

Consider disadvantages of going public Consider alternatives to RTO

Initial public trading through SB-2

4 to 6 months

Can the private company do a RTO

Too many shareholders Is private company prepared to go public

16

Action Plan for RTO

Prepare Private Company

Enhance value

Prepare pitch sheet and business plan

Get prepared to go public Complete management team Retain attorneys Retain auditors Retain advisors for RTO going public

17

Action Plan for RTO

Corporate clean-up

Disclosures Contracts Disputes Capital Structure Balance Sheet

Retain IR (investor relations) firm

18

Action Plan for RTO

Determine type of RTO terms private company wants

High percentage Low percentage Cash v. equity Letter of Intent Deposit Due diligence team in place

Be prepared to move fast

Be prepared to be public within weeks

19

Negotiating the RTO

Initial contacts Initial due diligence Letter of intent Deposit Definitive agreement

20

Negotiating the RTO

Complete due diligence Close Change Board of Directors Change Name New CUSIP/Symbol File 8-K Complete audit of private company File 8-K/A with audited financial statements

21

Initial Contacts with Shell Owner/Broker and Initial Due Diligence

Do they control this shell What terms do they want

Cash/equity/deposits

Background of shell owners/brokers What are their time requirements

22

Initial Contacts with Shell Owner/Broker and Initial Due Diligence

Initial due diligence

Due diligence package from shell Review SEC filings Trading status

BB Pink sheets Non-trading NASDAQ AMEX

23

Initial Contacts with Shell Owner/Broker and Initial Due Diligence

SEC reporting status

Reporting/non-reporting Late or delinquent filings 12(g) or 15(d)

Percent of stock/float available

24

Initial Contacts with Shell Owner/Broker and Initial Due Diligence

Regulatory Background

How long trading How long reporting How start trading

Public offering Manufactured Stalking horse Bankruptcy

25

Initial Due Diligence

Liabilities from past

How long dormant Nature of operations Possible SEC, NASD problems

26

Initial Due Diligence

Capital Structure

Number of shares outstanding Warrants, options, convertibles Number of shares authorized Number of shares in float Number of shareholders Number of shareholders in float

27

Initial Due Diligence

Ownership/Control History

Multiple prior owners/control persons Background of prior owners/control persons Prior RTOs

28

Terms of RTO

Merger Reverse triangular merger Exchange offer Cash for control Cash for float

29

Terms of RTO

Equity exchange ratio Hold back, scheduling agreements Assets/liabilities Representation and warranties Investment capital at closing of RTO

30

SEC Reporting Requirements

Current rules

Form 8-K within 4 business days

Terms of RTO agreement Brief description of company ID of new control persons Audited financial statements

Amended 8-K within 71 days after 8-K

31

SEC Reporting Requirements

Proposed Rules

Form 8-K within 4 business days with Form 10 level of disclosures including audited financial statements

Minimum requirements More extensive disclosures recommended

32

Disclosure and Marketing Plan

Investor Relations (IR) Firms Budget for IR Importance of credibility, meeting expectations

33

Major Reasons for Failure

Failure to protect against illegal and abusive practices after the reverse merger Failure to adequately conduct due diligence Poor structuring of finished public company Failure to adequately prepare to be publicly traded

34

Major Reasons for Failure,

Failure to prepare and execute plan for managing the market Failure to prepare and execute disclosure program Poor selection of professionals and advisors

35